1. Environmental and Clean Air Regulations M IDSTREAM E NERGY L AW C ONFERENCE : M EETING THE D EMAND FOR I NFRASTRUCTURE H OUSTON, T EXAS December 7, 2012 Benjamin Rhem Jackson Walker L.L.P. brhem@jw.com 512.236.2012

2. Presentation Outline Federal Clean Air Act Basics Greenhouse Gas Regulations Texas Air Permitting Structure Aggregation of Oil and Gas Sites EPA and TCEQ Legal Conflict Regarding Regulation of Oil and Gas Operations Compliance Best Practices

3. Federal Clean Air Act Basics National Ambient Air Quality Standards New Source Performance Standards National Emission Standards for Hazardous Air Pollutants State Implementation Plans

4. Recent EPA Oil and Gas Regulations On August 16, 2012, the following new air regulations were published in the Federal Register –NSPS Subpart OOOO, Crude Oil and Natural Gas Production, Transmission and Distribution –NESHAP Subpart HH, Oil and Natural Gas Production –NESHAP Subpart HHH, Natural Gas Transmission and Storage

5. Recent EPA Oil and Gas Regulations What facilities are covered under Subpart OOOO? –Production sites –Gathering stations –Natural gas plants –Transmission compression –Underground natural gas storage

6. Recent EPA Oil and Gas Regulations NSPS OOOO –LDAR – natural gas processing plants are subject to more stringent definition of “leak,” more frequent monitoring, and monitoring of more components –SO2 Emissions – natural gas processing plants with sulfur feed rates of more than 2 long tons/day must control emissions up to 99% depending on feed rate and concentration

7. Recent EPA Oil and Gas Regulations NSPS OOOO –Natural gas wells using hydraulic fracturing must control VOC emissions with green completions by 2015, but until then may use flares –Centrifugal and reciprocating compressors are subject to certain seal and packing requirements –All storage vessels are required to control VOC and HAPS emissions to 95%

8. Recent EPA Oil and Gas Regulations NESHAP HHH –Retains requirement that Large Glycol Dehydrators must reduce benzene emissions to less than 1 ton per year or reduce total air toxics by 95% –Small Glycol Dehydrators must meet unit specific limits for BTEX based on throughput and gas composition

9. Program Conflicts NSPS (40 CFR, Subpart OOOO) –EPA’s recently finalized NSPS for oil and gas facilities require flaring of emissions associated with flowback from hydraulic fracturing operations. –When this flowback contains high concentrations of sulfur compounds, the flaring process can actually create significant SO2 emissions. NAAQS (CAA § 109) –In some areas with a high density of fracking operations, TCEQ is concerned that the required flaring operations may cause an exceedance of the SO2 NAAQS.

10. Greenhouse Gas Regulations Reporting Rule GHG Permitting a. Mass. v. EPA b. Endangerment Finding c. Tailpipe Rule d. Tailoring Rule e. Texas’ Challenge

11. TCEQ Permitting Structure De Minimis Sources Permits By Rule Standard Permits New Source Review Permits MSS Authorizations

12. TCEQ Permitting Structure Title V –Federal Program – delegated to TCEQ –Only applies to “major sources” NSPS NESHAPS

13. Aggregation of Oil and Gas Sites EPA regulations, 40 C.F.R. 52.21(b)(6), require –aggregation into a single source based upon: Common control, by the same person Located on contiguous or adjacent properties Same Industrial SIC grouping

14. Summit v. EPA Nos. 09-4348,10-4572, Decided August 7, 2012, 6 th Circuit Court of Appeals EPA determined that 100 sour gas wells that were within a roughly 40 square mile area constituted a single stationary source because they were "adjacent." –Some of the wells and flares were located up to 8 miles from the sweetening plant –Furthermore, the operator did not own all the land between the plants and wells The 6th Circuit found that EPA's reliance on whether sources were functionally related in determining whether those sources should be aggregated was contrary to the plain meaning of "adjacent."

15. EPA and TCEQ Legal Conflicts and the SIP Gap Legal Challenges –On October 12, 2012, Texas filed a petition for review of the EPA’s Final Oil and Gas NSPS and NESHAP rules SIP Gap –TCEQ adopts rules and incorporates them into the SIP, but the EPA has not approved

16. What is an operator supposed to do when presented with differing regulations from the federal and state environmental agencies, or when a state challenges federal regulations? –Example of the TCEQ Flex Permitting Program –Texas and other petitioners have been winning a fair share of their challenges to EPA regulations, further complicating the decision operators face EPA and TCEQ Legal Conflicts and the SIP Gap

17. Best Practices No easy solution Environmental-specific compliance manager –Don’t assume safety manager will be knowledgeable about and able to handle all environmental issues Proactive approach –Waiting for a TCEQ or EPA investigator to show up at your site is rarely the right answer

18. Texas Environmental, Health, and Safety Audit Privilege Act Notice of Audit + Conduct Audit + Disclosure of Violations + Corrective Action Plan Immunity from penalties associated with those disclosed violations EPA to greatly reduce its implementation of its audit policy.

19. QUESTIONS? brhem@jw.com